Business Line Of Credit: What to Know and How to Get one
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Business Line of Credit

A business line of credit is one of the most sought-after types of small business loans. Data from the Federal Reserve found that nearly 80% of businesses turn to a traditional business loan or business line of credit for their financing needs.

Business lines of credit allow your small business to adapt as unexpected expenses arise and provide immediate access to flexible working capital. Depending on your situation and your business goals, a business line of credit might be the right fit.

What to Know About a Business Line of Credit?

If you need ongoing access to a credit line for your business, opening a business line of credit can be a solution. It’s a fixed credit line that’s typically in the amount of $50,000 to $500,000 — sometimes higher. You can borrow against or draw from your business line of credit whenever needed. 

A business line of credit can be used toward inventory, equipment, unplanned expenses, and more. It also offers additional flexibility for business expenses that can’t be paid with a business credit card, like payroll or vendor services.

If you have a $100,000 line of credit, for example, you can use it to cover anything from a $7,000 inventory purchase during one month, or $40,000 in cash flow to manage the business’s off-season later in the year. You can borrow as much or as little as your credit line allows, as long as you’re making your payments on time.

Secured vs. Unsecured Business Lines of Credit

There are secured and unsecured business lines of credit available. A secured business line of credit might offer higher spending limits and lower interest rates; the caveat is that they also require collateral to guarantee the loan. Unsecured business lines of credit are preferable if you don’t want or have collateral for the loan. However, unsecured business lines typically come with lower spending limits and higher interest rates to hedge the default risk for lenders.

Business Lines of Credit Terms

Lenders often issue business lines of credit for a predetermined time frame, generally up to five years. During this period you can access your business line of credit. 

Unlike a traditional business loan, which offers a lump-sum payout and charges interest on the full loan, you’ll only need to repay the amount you’ve actually borrowed from your business line of credit. Additionally, the interest that you’re charged only applies to the amount you’ve actually borrowed. Your business line of credit will have a regular payment schedule whether weekly or monthly, which you can repay over time.

Pros and Cons of a Business Line of Credit

Benefits of a Business Line of Credit
  • Flexible borrowing. Funds from the credit line can be used at varying amounts within the limit, and toward any business-related expense, like payroll, inventory, and more.
  • Access to capital whenever you need it. Unlike a traditional business loan, business lines of credit let you draw funds as you need them, and you’ll only repay what you borrowed.
  • Only pay interest on the amount drawn. You only owe interest on the amount that you’ve borrowed against the account, not the entire limit.
Disadvantages of a Business Line of Credit
  • No cash flow makes approval a challenge. Small businesses, particularly those that are just starting out and don’t have reliable cash flow, face difficulty getting approved for a business line of credit.
  • Missed or late payments hurt your credit. Like other small business loans, failing to repay a business line of credit can adversely affect your personal and business credit profile.
  • Might charge additional fees. These fees include an annual fee, maintenance fee, origination fee, draw fee, and late fee. Compare lender fees to understand the true cost of a business line of credit. 
Pros & Cons
of a Business Line of Credit
Pros
Flexible Borrowing.

Funds from the credit line can be used at varying amounts within the limit, and toward any business-related expense, like payroll, inventory, and more

Access to capital whenever you need it.

Unlike a traditional business loan, business lines of credit let you draw funds as you need them, and you’ll only repay what you borrowed.

Only pay interest on the amount drawn.

You only owe interest on the amount that you’ve borrowed against the account, not the entire limit.

Pros & Cons
of a Business Line of Credit
Cons
No cash flow makes approval a challenge.

Small businesses, particularly those that are just starting out and don’t have reliable cash flow, face difficulty getting approved for a business line of credit.

Missed/late payments hurt your credit.

Like other small business loans, failing to repay a business line of credit can adversely affect your personal and business credit profile.

Might charge additional fees.

These fees include an annual fee, maintenance fee, origination fee, draw fee, and late fee. Compare lender fees to understand the true cost of a business line of credit.

How to Get the Best Business Line of Credit

If this sounds like the right financing option for you, be aware that business lines of credit are offered by multiple banks and institutions. You’ll need to shop around to find the best business line of credit for your needs. 

One way to get a secured or unsecured business line of credit is through a bank which you already have a business relationship with. For example, the financial institution that manages your business checking account. 

Leveraging your existing banking relationship might offer access to competitive lending terms and business line of credit rates since the bank is already familiar with your business and cash flow. When applying for a business line of credit it can take as little as one business day to multiple months to get approved, depending on your lender.

However, even if your existing bank offers you a business line of credit, it’s best to compare multiple offers. Reach out to competing traditional and online lenders. 

Below are the documents you’ll need for an unsecured business line of credit:

  • Identification (such as a driver’s license or US passport)
  • Bank statements
  • Profit & loss statements
  • Balance sheets
  • At least two years of business tax returns
  • At least two years of personal tax returns

If you’re applying for a secured business line of credit, be prepared to provide documents related to the collateral you’ll use for the loan.

Sorting through the various lenders’ business line of credit requirements and figuring out which one is the right fit for your business takes time away from your business. This is where a small business loan broker, like Llama Loan, can help. 

We match you to the best business line of credit for your needs so you can focus on managing your business. Get Started Today.

How to Use a Business Line of Credit

If you’re approved for a business line of credit, your lender will disclose the maximum credit line it has issued your business. Additionally, your business line of credit will have a specified timeline in which you can draw funds.

It works similarly to a credit card, in that a business line of credit gives you revolving access to financing. When you draw $50,000 from your $100,000 business line of credit, you’ll only have access to $50,000 of credit for your next purchase or transaction. 

As you repay the credit line, the amount you’ve paid back is tallied onto your available credit line amount. This allows you to continuously have access to your credit line amount, minus any unpaid draws.

Business Line of Credit Rates

Business line of credit rates is typically lower than what you’d find through a business credit card. According to the Federal Reserve Bank of Kansas City, the median fixed interest rate for new business lines of credit in the second quarter of 2022 was 4.36%. For variable business line of credit rates, the median rate was 5.58%. Conversely, business credit cards typically have an average variable APR of 17.62%.

Business Line of Credit Draw Period

The length of time you’ll have access to a business line of credit depends on multiple factors like your lender, credit history, business health, and more. Generally, business lines of credit care are offered for as short as 12 months or as long as five years. 

Once the draw period ends, you might be able to review the line of credit. However, lenders will reassess your business’s health to ensure it still meets the bank’s underwriting requirements and still has adequate revenue to repay the credit line. 

The Bottom Line

A business line of credit provides immediate, short-term working capital so you can keep your business moving forward. It offers flexible financing compared to a traditional business loan and can save you money on interest charges compared to a business credit card.

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